Dell: Going Private Is Best Option for PC Maker

By Jeffrey Burt |
Posted 2013-02-11

Dell: Going Private Is Best Option for PC Maker

Dell executives, seeing growing discontent among some shareholders over their $24.4 billion leveraged buyout plan, said in a regulatory filing Feb. 11 that after a review of all options, taking the world's third-largest PC maker private made the most sense.

The special committee created by Dell's board of directors "considered an array of strategic alternatives," going so far as to hire a "prominent management consultant to help it assess the company's strategic position," Dell officials said in the filing with the Securities and Exchange Commission (SEC).

"Based on that work, the board concluded that the proposed all-cash transaction is in the best interests of stockholders," the company said. "The transaction offers an attractive and immediate premium for stockholders and shifts the risks facing the business to the buyer group. In addition, and importantly, the go-shop process provides stockholders an opportunity to determine if there are alternatives that are superior to the present offer."

After weeks of speculation, Dell executives announced that they are partnering with private equity firm Silver Lake Partners and Microsoft to take the company private, a move that will enable founder and CEO Michael Dell to speed up the transformation of his namesake company that he began in 2007 when he returned as the top executive.

The company is in the process of changing over from a PC and server maker to an enterprise IT solutions provider, a move that that included more than a dozen acquisitions in such areas as storage, networking, software and services. The transformation also has come as the worldwide PC market has begun to contract, putting pressure on Dell's financial numbers.

Michael Dell—who would retain control of the company under the buyout plan—and other executives would find it easier to make decisions regarding Dell outside the glare of Wall Street and the pressure of the quarterly financial demands, according to analysts.

The deal would pay investors $13.65 a share, a 25 percent premium over the share price last month. Despite the premium, a growing number of shareholders are balking, saying the price undervalues the company and doesn't give enough back to investors.

The most significant of these investors is Southeastern Management, which said in its own SEC filing Feb. 8 that they would not support the deal. In a letter to Dell's board of directors, also dated Feb. 8 and included in the SEC document, officials with the investment firm said they felt "extreme disappointment regarding the proposed go-private transaction, which we believe grossly undervalues the company. We also write to inform you that we will not vote in favor of the proposed transaction as currently structured."

The group said they don't oppose the decision to take the company private, only that they were looking for a fair deal for investors. "Unfortunately, the proposed Silver Lake transaction falls significantly short of that, and instead appears to be an effort to acquire Dell at a substantial discount to intrinsic value at the expense of public shareholders," officials said in the letter.

Dell: Going Private Is Best Option for PC Maker

The firm said it would consider a proxy fight to make sure the deal doesn’t go through. With 8.5 percent of Dell’s shares, Southeastern Management is the company’s largest independent shareholder and carries some clout.

Sources told Reuters Feb. 8 that a number of other shareholders—Harris Associates, Yacktman Asset Management and Pzena Investment Management—are supporting Southeastern Management’s decision to vote against the deal. Pzena Chairman Richard Pzena told Reuters a price tag for Dell should be about $20 per share. Combined, the three firms own about 3.3 percent of Dell shares.

Other shareholders who have said they will oppose the deal include Alpine Capital Research—which holds about 2 million shares—and Schneider Capital Management, with its about 350,000 shares.

Several law firms also said they were investigating the decision-making behind the deal.

The $24.4 billion deal includes a 45-day “go shop” period where Dell’s special committee can entertain other offers. However, the termination fees of $180 million or $450 million make it unlikely that other offerings be made, according to some analysts.

Michael Dell is also trying to assure customers that the deal will not slow the company’s progress or hurt its ability to invest.

“We believe that our proposed new ownership will provide long-term support to help Dell innovate, invest for growth and accelerate our transformation strategy,” Dell said in the letter posted on the company’s Website. “We’ll have the flexibility to continue organic and inorganic investment and drive industry-leading innovation.”

Less than an hour after Dell announced the deal Feb. 5, officials at Hewlett-Packard released a statement targeting Dell customers who might be unsettled about the buyout.

“Dell has a very tough road ahead,” HP officials said in the statement. “The company faces an extended period of uncertainty and transition that will not be good for its customers. And with a significant debt load, Dell's ability to invest in new products and services will be extremely limited. Leveraged buyouts tend to leave existing customers and innovation at the curb. We believe Dell's customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity."